When evaluating a potential acquisition—especially an online business—the P&L, or Income Statement, is your roadmap to understanding its performance. It reveals not just numbers, but the story of how the business operates, its strengths, and its potential pitfalls. Let’s dive in, starting with revenue, and explore the key questions every buyer should ask when reviewing an online company’s financials. 

Pro tip: Look for suspiciously round numbers, inconsistent expense categorization, or revenue that doesn’t align with cash flow statements. These could hint at estimating, or even manipulation to make the business look more attractive.

Revenue: The Foundation of the Business

Revenue is where I begin. Is the company reliant on a single stream—say, one product or marketplace—or does it draw from multiple sources, like its own website, Amazon, and subscriptions? Over-dependence on one channel (e.g., a single platform like EBay or Amazon) could spell risk if that channel falters. Next, clarify the reporting: Is revenue net of taxes, refunds, and chargebacks, or do those need to be deducted? For online businesses, high return rates or customer disputes can significantly erode the top line, so look for those details.

Returns and Refunds: The E-Commerce X-Factor

Online businesses often face higher return rates than brick-and-mortar counterparts. Is there a separate line item for returns, or are they netted against revenue? A high return rate could signal product quality issues or poor customer targeting—both red flags. If subscriptions are part of the model, check churn rates and recurring revenue stability. Weak retention undermines the predictability that makes subscription businesses attractive.I like to insert a new line into the spreadsheet below gross profits and calculate the percentage across the months to quickly see stability or fluctuations of the company. I also do this under marketing expenses, net profit margins, and most variable expenses.  

COGS and Gross Profit: A Margin That Matters

For an online company selling branded products, gross profit percentage is a make-or-break metric. You’re aiming for 60-70%, with 80% being the dream. Why? High margins fund the heavy marketing spend typical of e-commerce and leave room for customer acquisition costs (CAC). A low margin might mean the business struggles to scale profitably, especially if it’s battling rising ad costs or shipping fees. 

Is the profit and loss (P&L) on a cash or accrual basis? Wildly fluctuating cost of goods sold (COGS) tied to inventory often signals a cash basis, which can obscure trends. Speaking of COGS, does it cover just product costs, or are freight-in and shipping-to-customer expenses included? Some businesses lump it all into one COGS line item; others break out freight within COGS and list shipping under operating expenses. There’s no one-size-fits-all approach, so decoding the structure is essential for accurate analysis.

I like to insert a new line into the spreadsheet below gross profits and calculate the percentage across the months to quickly see stability or fluctuations of the company. I also do this under marketing expenses, net profit margins, and most variable expenses.  

Marketing and Customer Acquisition: The Engine of Growth

Marketing often follows revenue and COGS on the P&L. Some companies roll it into a single “advertising and marketing” line, but the best break it out by platform—Facebook, Google, TikTok, etc. This granularity shows where they’re investing and how reliant they are on paid traffic, a hallmark of online businesses. Compare monthly spend to gross revenue: Is it steady, or do wild swings suggest an inconsistent strategy? Are marketing costs growing and thus shrinking margins? If so, it may signal the company has not increased prices and there may be room to do so.

For e-commerce, also calculate blended ROAS, also called the Marketing Efficiency Ratio (MER) - divide total revenue by total marketing spend. A healthy MER for a profitable company will typically be above 3 and as high as 4 - 5. If the ROAS or MER is too low, it leaves very little margin of error to continue net margins. If the MER is too high, it may be difficult to maintain that level of profitability long term due to uncontrollable fluctuations in Meta algorithms or new competition entering the market. 

Look at organic versus paid growth, too. Does the P&L hint at SEO or email marketing efforts driving revenue without ad spend? Low organic traction could mean over-reliance on costly paid channels and a riskier acquisition. Be careful, too much reliance on SEO and organic traffic has just as many risks, as Google is notorious for dramatically changing their algorithm and causing many sites to experience traffic falling off a cliff.

Payroll and Contractors: Who’s Running the Show?

Examine team expenses. Are they paying W-2 employees or 1099 contractors? Online businesses often lean on freelancers for flexibility—think content creators, ad managers, or fulfillment staff. Also, watch for personal expenses run through the business (e.g., travel, utilities, charitable donations) that can be added back to normalize profits. Some owners get lavish, expensing exotic cars, planes, or vacation homes—items irrelevant to driving revenue in an online operation.

Software and Digital Infrastructure: The Operational Pulse

Software spend is a big deal for online companies. Look for consistency—wild fluctuations might mean they’ve churned through tools like CRMs, email platforms, or inventory management systems. Check for essentials: e-commerce platforms (Shopify, WooCommerce), analytics tools, and automation software (Klaviyo). Are hosting fees or cloud storage costs buried in there? These are the backbone of a digital business.

Then, review credit card processing fees—Stripe, Shop Pay, PayPal, etc. What percentage of transactions occur on the native platform versus secondary processors? High PayPal usage might signal an older customer base or off-platform sales (e.g., via social media). Any history of processor issues—like holdbacks or account freezes—could point to cash flow hiccups or fraud risks.

Profitability and Seasonality: The Big Picture

Zoom out to assess month-to-month profitability. Are all months profitable, or do some bleed red? E-commerce is often seasonal—think holiday spikes or summer slumps—so multiple loss-making months aren’t unusual. The question is: Does the company have cash reserves to weather lean periods? Inventory ties into this, too. How much is on hand, and what’s included in the sale? If there’s excess, will it come on consignment, or must you buy it outright? Also, ask about working capital. Ideally, the seller includes cash in the deal so you’re not covering expenses out of pocket before cash flow kicks in.

Debt and Cash Flow: The Growth Engine

Are there any large interest line items? Check the balance sheet for debt. Has cash flow funded growth, or have loans propped up inventory purchases? Online businesses can burn cash fast, scaling ad spend or stock, so debt isn’t uncommon—but it’s a burden you may inherit if growth continues. Also, look at cash conversion cycles: How long does it take from buying inventory to collecting revenue? Slow cycles can strain liquidity.

Final Thoughts

A thorough review of the P&L and balance sheet reveals the DNA of an online business: revenue diversity, margin strength, marketing efficiency, operational quirks, and financial resilience. Add in e-commerce-specific lenses—ROAS, returns, digital infrastructure, and subscription health—and you’ll spot opportunities and risks alike. These aren’t just numbers; they’re the blueprint for deciding if this business is a goldmine or a money pit. Ask the right questions, and you’ll see the full picture.

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